A slow wasting disease

In the second of a series on leasehold rights, Karen Woolfson looks at short-lease syndrome

Amid all the happy talk of a housing market recovery, tens of thousands of people who bought during the last boom are discovering that their properties are a slowly degenerating asset. They are victims of what is beginning to be known as "short lease syndrome".

This asset-wasting disease strikes those whose flat leases, often bought during the boom years in the 1970s and 1980s, have 80 years or less to run. Those affected may have started out with 99-year leasehold, but time is beginning to run out for them.

The prognosis for those with this syndrome is increasing weakness in the property market: when leases begin to run below 80 years, potential buyers are deterred because mortgages become harder to obtain. This makes selling the flat much harder, leading to debilitating falls in its value.

Tim Curran, a chartered surveyor and director of Leasehold Enfranchisement, a firm that helps people to resolve leasehold issues, says: "First-time buyers are particularly cautious about purchasing flats which don't have a long lease, as they may only want to stay in the property for around five years."

One option, which became available by law three years ago, has been the possibility of extending a lease by 90 years. As with so many things, Mr Curran advises that anyone wanting to do so should begin the process right away: buyers tend to place significant value on putting their money into a property with a low hassle factor and extending a lease has that potential.

The first step is to appoint a solicitor as well as a valuer at an early stage, but not before checking them out first. He suggests asking potential advisers how familiar they are with leasehold laws, how many cases they've dealt with under the appropriate legislation, to refer them to a satisfied client and to give details of their fee structure.

The next hurdle involves obtaining a lease extension through a landlord who is willing to negotiate; and if this fails, claiming their rights under the Leasehold Reform Act 1993.

Tenants first need to check whether they are eligible for an extension of a standard 90 years. You must have a lease where the original term was for more than 21 years - regardless of what's left on the present lease - and have lived in the flat as your main residence for the past three years or for three out of the past 10 years. However, your lease will be excluded if the flat is provided as part of the function of a charitable housing trust, is a business lease, or the landlord is the Crown.

Extending a lease costs money, because the freeholder is in effect conferring an additional benefit for which the leaseholder is expected to pay. How much? Peter Haler, chief executive of the Leasehold Advisory Service, says: "The rough rule of thumb is to assess what the property is worth today, for example pounds 50,000, and what it would be worth tomorrow with the lease extension, for example pounds 60,000. Then take 60 per cent of the gap between these two figures and you come to a price of pounds 6,000."

One of the big problems is the enormous gap that often exists between the valuations provided by the landlord's and the tenant's advisers. It may be worth the tenant paying a little over the odds to strike a deal, but if the disparity between what is a fair price and what the landlord wants is too great then they may have to start the legal process.

Tenants who qualify must serve a notice on the landlord formally offering a price for the lease extension in order to trigger the legal procedure. If the landlord does not accept this price and further negotiations prove unfruitful, then tenants may apply to the Leasehold Valuation Tribunal to set a fair price.

There are three elements to calculating what the premium should be for a lease extension. First, the tenant must compensate the landlord for the loss of ground rent for the number of years unexpired on the lease. Second, the landlord must be compensated for waiting an extra 90 years before the property reverts back to him. This involves taking the current value of the flat, for example pounds 50,000, which is artificially depressed because of the short lease, and what the market value would be if the lease was extended by 90 years, say pounds 60,000.

The third calculation, known as "the marriage value", is the most frustrating. The flat is worth pounds 50,000 today and may be worth pounds 60,000 with the lease extension, producing a latent profit of pounds 10,000, and the law says some of this should go to the landlord. The problem is that the Act states that the landlord should receive at least half of this profit, creating scope for interpretation.

Apart from the three elements of premium, homeowners will have to pay "reasonable" costs of the landlord, which include investigating the claim, obtaining a valuation and granting a new lease; plus their own costs; and those of the new lease which will reduce rent to virtually nothing.

At the end of the day, owner-occupiers need to decide whether the whole procedure is worth their time, energy and money. They can sometimes opt to buy the freehold instead. This will be explored in the next articlen

An information pack on how to extend your lease, and a list of surveyors, is available from the Leasehold Advisory Service (0171-493 3116).

Special offer for readers: 'Buying Your Freehold or Extending Your Lease', by Tim Curran, is available at the reduced price of pounds 9.99 (was pounds 11.99, P&P inc) until 30 June. Cheques (payable to Leasehold Enfranchisement Ltd) to 33 St George's Drive, London SWIV 4DO.